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Unfolding Economic Slowdown

What is the growth status of the economy?

1. The growth rate of real gross domestic product (GDP) has dipped to 5% in the first quarter (Q1) of the current financial year, the lowest recorded in recent years.

2. Both consumption and investment demands have contributed to this depressed economic situation.

3. The private final consumption expenditure (PFCE) grew at 3.1% during the first quarter (Q1) of the current year compared to 7.3% in 2018.

4. The PFCE growth had similarly contracted to 4.1% during the fourth quarter (Q4) of 2016–17, immediately following demonetization.

5. Gross fixed capital formation (GFCF) also exhibited a similar growth trend. It grew by 4% in Q1 of the current year against 13.3% in the previous year, and 2% in Q4 of 2016–17.

Which are the sectors affected?

1. The producing sectors, such as agriculture, mining, and quarrying, and manufacturing have witnessed a serious setback in growth during Q1 of 2019–20.

2. The gross value added (GVA) of the manufacturing sector grew by just 0.6% compared to a growth of 12.1% during the same period last year.

3. During the quarter, the year-on-year (y-o-y) growth rates in the Index of Industrial Production (IIP) of major industries have remained meager or suffered negative growth.

4. The widespread slackening of growth across these major industries had detrimental effects on the economy’s performance and can to affect the medium-term.

Why is this decline being seen?

1. Ill-advised demonetization announcement.

2. Improperly implemented GST.

3. Decline might persist if the pressure on international oil price spirals up due to the unrest in West Asia following the drone strikes on Saudi Arabia’s refinery facility.

Where is the effect of this declining trend seen?

1. Highest ever unemployment rates reported since 1972–73.

2. Due to passive growth of sale of the automobile, major auto companies have increased “non-working” days (holiday without pay) and reduced subcontracting activities.

3. The advance tax collected has decreased as income generation in the formal sector is badly affected.

4. The RBI has suggested to banks to link their lending rates to the repo rate.

5. Deposit growth in the banking industry is contracting as a result of competition from other saving instruments.

How is the government handling the situation?

The government has announced a slew of revival packages. This includes-

1. Amalgamation of 10 banks with recapitalization to the tune of ₹50,000 crores.

2. Rollback on the surcharge on tax on foreign portfolio investors.

3. Specific measures related to automobiles, housing and export sectors.

4. Loan melas in 400 districts

5. Slashing of basic corporate tax rates to 22% from 30%.

Conclusion

1. A radical change in macroeconomic policies both monetary and fiscal in favor of providing ­expansionary impulses is required.

2. Expansionary fiscal policies to provide impetus to both consumption and investment, particularly in the rural sector, are also necessary.

3. A fresh look at the policy of fiscal consolidation might help to tackle the present situation.